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6-12

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last
year at selling price of $20 per game. Fixed costs associated with the game total $182,000 per year,
and variable costs are $6 per game. Production of the game is entrusted to a printing contractor.
Variable costs consist mostly of a payment to this contractor.

Required
1. Prepare a contribution format income statement for the game last year and compute the
degree of operating leverage.
2. Management is confident that the company can sell 18,000 game next year (an increase of
3,000 games, or 20% over last year).
Compute:
a. The expected percentage increase in net operating income for next year.
b. The expected total dollar net operating income for next year (Do not prepare an income
statement: use the degree of operating leverage to compute your answer.)

6-13

Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls- the
Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two
products follow:

Product_______________________________
Flight Dynamic Sure Shot Total
Sales..P150,000 P250,000 P400,000
CM ratio 80% 36% ?

Fixed expense total P183, 750 per month. (The currency in the Philippines is the peso, which is
denoted by P.)

Required:
1. Prepare a contribution format income s statement for the company as a whole. Carry
computations to one decimal place.

2. Compute the break-even point for the company based on the current sales mix.

3. If sales in increase by P100,000 a month by how much would you expect net operating income
to increase? What are your assumptions?
23- A
Sales Mix; Break-Even Analysis; Margin of Safety
Island Novelties, Inc., of Palau makes two products. Hawaiian Fantasy and Tahitian Joy. Present
revenue cost and sales data for the two products follow:

Hawaiian Tahitian
Fantasy Joy

Selling price per unit.$15 $100


Variable expenses per unit ..$9 $20
Number of unit sold annually .20,000 5,000

Fixed expense total $475,800 per year. The Republic of Palau uses the U.S. dollar as its currency.

Required
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing both dollar and percent
columns for each product and for the company as a whole.
b. Compute the break-even point in dollar for the company as whole and the margin of
safety in both dollars and percent.

2. The company has developed a new product to called Samoan Delight. Assume that the
company could sell 10,000 units at $45 each. The variable expense would be $36 each. The
companys fixed expenses would not change.
a. Prepare another contributions format income statement, including sales of the
Samoan Delight (sales of the other two products would not change).
b. Compute the companys new break-even point in dollar and the new margin of
safety in both dollars and percent.

3. The president of the company examines your figures and says, Theres something
strange here. Our fixed costs havent changed and you show greater total contribution
margin if we add the new product, but you also show our break-even point going up. With
greater contribution margin, the break-even point should go down, not up. Youve made a
mistake somewhere. Explain to the president what has happened.